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Foreign aid: help or debt entrapment

Ahmed Sadek Yousuf and Mohiuddin Alamgir find the verdict behind the debate for and against foreign aid in the Bangladeshi context.

Over the last few decades, one topic that has decisively divided economists around the world along deep running lines of sharply differing opinions is the issue of debt servicing by Least Developed Nations.

While most experts widely contend that foreign aid, in monetary format or extension of credit, merely on its own only manages to buy the host nation a short lease of comfort, some of them and others also contend that without efficient utilisation of foreign aid, these nations risk slipping into the abyss of debt entrapment, like Nigeria, in the recent past.

However, proponents also point out that foreign aid were hugely essential in kick-starting the economies of many nations today, most notably Japan, and also Germany, which following World War II had their economic infrastructure totally dismantled. So, it is worth an insight to find out the true merits of foreign aid, in the context of Bangladesh’s economic perspective, which itself happen to be a developing nation.

Traditionally, foreign aid is availed by developed nations as primarily a means of compensating for the shortfall of capital stock in developing nations, which is so instrumental for the economic livelihood of a developing nation.

‘Bangladesh depends on foreign aid to fill the gap of budget deficit, to meet the substantially widening balance of payment deficit for international trade, and to fund the Annual Development Program (ADP),’ says Dr M M Akash, professor of economics at Dhaka University. ‘Usually, the country receives foreign assistance under three broad categories – food aid, commodity aid, and projects aid.’

According to prominent economist Professor Abul Barkat, of the department of economics at the University of Dhaka, Bangladesh has been recipient to foreign aid and grants to the tune of about taka two lakh crores from the international finance organizations (IFIs) in the last three decades alone.

Most of the foreign aid or grants go to development works like bridge, roads, highways and infrastructural works. While prime focus of aid is economic development with the intended aim of attacking poverty, the other issues that had crept in to the aid debate over the years, with changing perspective of donors’ aid strategy, are governance, democracy, human rights environment and institutional reforms etc.

The Bangladesh Aid Group, an international consortium of donors, comprising of 14 affluent nations and 12 international development agencies, meet every year to review development in the economy of Bangladesh, and as such, aside from prescribing courses of action for the economy, also takes decision on the amount of aid. Members of the Aid Group include Australia, Belgium, Canada, Denmark, France, Finland, Germany, Italy, Japan, Netherlands, Norway, Sweden, Switzerland, UK, USA, International Development Association (IDA), Asian Development Bank (ADB), European Union EU, International Fund for Agricultural Development (IFAD), UN agencies, the Ford Foundation and Asia Foundation.

Since mid 1980s and early 1990s, aid has come through a wide range of policy reform agenda platforms under the Structural Adjustment Policy (SAP), Poverty Reduction Grant Facility (PRGF), poverty reduction strategy paper( PRSP), and so on. Now around 50 per cent of the Annual Development Budget (ADP) comes from foreign aid in sharp comparison to Ershad’s period where 112 per cent foreign aid were siphoned in to satisfy national requirements. Bangladesh, in the initial years following independence in 1971, was heavily dependent on food aid. With time, it eventually became attenuated and gave way to loans and much of the aid arrives as project aid.

In Bangladesh, outstanding external debt as of present, sums up to $20,250 million, and per capita external debt amounts to $151 million. The amount set aside for annual debt servicing for Bangladesh is $1400 million, while the annual health budget of the country is around $500-700 million over the last few years.

Debt servicing as percentage of export earnings was 14 per cent. In the current scenario, the net ODA (Official Development Assistance) trend had been decreasing and now is to the tune of 37 per cent of the 1999 level; debt servicing liabilities of the annual budget 2007-08 amounted to 20 per cent; sharing of ODA in the annual development programmes were 49

per cent; debt servicing liabilities amounted to 48 per cent for World Bank, 26 per cent for ADB, 11 per cent for IMF and 13 per cent for Japan govt.’

Also, in a Jubilee Netherlands (2005) study, it has been shown that for per dollar grant aid, Bangladesh pays loan payment of $ 1.50.

Bad aid

‘Only 25 per cent of foreign aid effectively went to the poor,’ says Barakat. ‘For each $100 aid, $25 went back to its origin on repayment terms, $30 were ‘eaten up’ by the bureaucrats, politicians, commission agents, consultants and contractors, and another $20 went to the urban and rural elite in different forms,’ he adds.

‘This comprises a formidable loss and a blow to the nation’s attempts to eradicate poverty,’ he says.

In fact, according to Barakat, the situation has now got to a point where if the international finance institutions were to stop issuing aid to Bangladesh, Bangladesh would still have to pay interest for another 40 years just to settle the cumulative amounts due on loans.

‘Initially, in the early stages, Bangladesh used to receive grants from World Bank, International Monetary Fund, Asian Development Bank and other IFIs. However, as time bid by, these grants transformed into loans,’ adds Barakat.

The focal point of criticism, however, for most programmes, is the seemingly non transparent manner in which the aid is disbursed. According to various quarters, over the last few decades what has come literally into fashion is the inclusion of other mandatory clauses in the provision for aid, which requires meeting such stringent conditions as governance and human rights standards as well as the political climate.

Exploited

In a booklet written by Md Shamsuddoha, general secretary of Equity and Justice Working Group and Rezaul Karim, the authors describe in almost graphic detail the misuse of the foreign aid or grants in our country. In the end, Bangladesh economy emerges as the worst hit, as the authorities still have to pay for the loans.

Japan is the biggest donor in respect to infrastructure development and as a part of the ‘strings tied’ Japanese construction firms are engaged in infrastructure development.

In yet another display of rather how the Bangladesh government is scrupulously exploited in terms of quality of work, recent cracks were unearthed on the Jamuna Bridge, the country’s only bridge connecting the north and the south. As a consequence, heavily loaded trucks were barred from going over the bridge.

Constructed from 1994 till 1998, the bridges total cost was estimated to be $ 962 million. The government of Bangladesh paid 34 per cent of the total cost, Asian Development Bank (ADB) shared 22 per cent of the cost, International Development Association (IDA) 22 per cent and others 22 per cent. The bridge was constructed by a South Korean company Hyundai, and was given a guarantee for 100 years.

But within eight years, in 2006, cracks were found in several places, ranging 0.7 mm to 0.9 mm. Out of eight expansion joints, joint no. 7 came off, expansion joint no. 8 was in bad shape and four other joints were found loose. The government formed a committee, and after having investigated the matter, came to the conclusion of ‘serious design deficiency and construction flaw’. Remedial and repair works were proposed, but these were to run over a course of 16 months and would further cost the government’s coffers $100 million.

Allegations were also deemed to be correct in the case of SBCP and then in 2003 the project was cancelled. It was reported that around 50 per cent of the project money had been simply ‘blown away’ i.e. spent as salaries and benefits of foreign consultants, with some of the consultants getting salary as high as $15000 per month. Although ADB had withdrawn its support from this project, the Bangladesh government already owed $77 million to ADB.

There were at least two projects; one funded by the World Bank during 1996 to 2000, i.e., Union Health Complex Constructions and the other one funded by ADB with other agencies (2000-2006) for educating non attending school children, which were found politically motivated just to please and play to the whims of the political regimes of those periods.

Sometimes political governments take up project work with the loan money from International Finance Institutions (IFIs) to placate their party people from the grassroots to the top level, and even if it becomes known to the donors, questions are hardly raised.

A circle of local consultant firms, bureaucrats, engineers, and contractors thus end up being the top notch beneficiaries, after having unscrupulously siphoned off money from donor funded projects. These local consultants and firms, who provide local consultants, also are the founders of NGOs, and hence receive subcontracts of the projects.

Very often, the money intended for project purposes go into maintenance of office premises as well as residence decoration of high profile officials of government. It has also been widely alleged that other department officials borrow vehicles earmarked for development projects for their own purposes. Also, due to such biasness, a particular government department has stood to gain the most while experiencing tremendous growth. The department inevitably took away the autonomy of local governments. A number of local government activists, in the country, had demanded abolition of this department so that the local government would gain relative autonomy and space for community participation ensured.

‘Despite the irregularities, we still have to pay interest. Projects these days take more time than is anticipated. In fact these days, most often, a two year project seldom nears completion in over four years, totalling up to more expenditure for the government,’ says Akash.

A study of Sushashoner Jonney Procharabhijan in 2007 reported that the government of Bangladesh (GOB) is spending more on external debt servicing than education or health. In 2007, Bangladesh spent almost 25 per cent of its revenue for external debt servicing while spending 15.65 per cent and 5.89 per cent of its revenue expenditure on education and health respectively.

As of June 2007, the total outstanding external debt stood at US $20713.1 million of which Medium and Long-term External Debt (MLT) mostly taken from the Multi-lateral and bi-lateral donors including G8 countries is US $19,354.8 million i.e. almost 97 per cent of the total debt outstanding.

According to the official statistics, the overall external debt servicing rose from $892.7 million in 2001 to $1551.3 million in 2007 showing almost 65 per cent increase during the last seven years. Medium and Long-term debt servicing also shows a rising trend amounting to on an average $875 million from 2001 to 2007.

Every year Bangladesh pays, on an average $ 1070 million to its foreign creditors.

Per-capita debt obligations have dramatically shot up from $6.56 in 1974 to $ 151 in 2007.

Stringent policy conditionality (i.e. privatizing essential public services enterprises, trade liberalization, deregulation of market etc.) are attached with loans taken from bilateral and multilateral sources further exacerbating the situation that utterly denies the people’s rights. For every dollar in foreign grant aid received, the government spends over $1.5 in debt service to foreign creditors annually.

Bangladesh needs US$ 7.5 billion a year to finance the implementation of the MDGs (Millenium Development Goals). According to Shamsuddoha, Bangladesh can no longer afford to pay a single dollar for debt servicing as every dollar paid in debt service is a dollar lost for the MDGs’. ‘Around the world, foreign prescription and loan flow reaches its peak when a non political dictator government is in power. It has happened in our country as well,’ Shamsuddoha adds.

Aid or no aid

There is also a school of thought that believes the key to economic success is appropriate usage of loans, and if utilised effectively, such loans can have a hugely important role to play.

‘Justifying foreign aid as good or bad is not a matter, what really matters is utilization of foreign aid in a proper manner,’ says Mustafizur Rahman, the executive director of the Centre for Policy Dialogue. ‘The importance of the aid package, covering both grants and loans, has undoubtedly contributed to the development of the economy. Foreign aid is immensely important as 50 per cent of the ADP budget comes from these funds.’

However, Tayebur Rahman, chairman of the department of Development Studies in the Dhaka University, strikes a completely opposite chord, when he says, ‘Bangladesh does not need foreign grants. We can budget our ADP from our internal resources. All we have to do is streamline our tax collection system. Our country has 20 lakh TIN holders and among them six to seven lakh pay their taxes regularly. Only one third of the ADP budget has been implemented in past years as most of it was used to pay the interest on foreign loans.’ He also feels that Bangladesh can acquire funds from remittances, if they are channelled in a legal manner.

If the existing scenario surrounding the debt climate in Bangladesh economy improves in the manner as the experts suggest, then there should be every reason to believe that over time, Bangladesh can successfully phase out financial aid. However, for the time being, it is optimal to stick to the status quo, and minimise the various system losses incurred at various points, thus increasing efficiency of the whole programme.